RBI unlikely to cut upper limit of HTM portfolios of banks

The Reserve Bank of India (RBI) is likely to keep the upper limit on held-to-maturity (HTM) portfolios of banks unchanged, at least in the near term. Though RBI had earlier said the HTM limit was high, reducing it might hit the profitability of banks. It would also lead to hurdles for the government's borrowing programme.

Asked whether the HTM limit would be reduced, RBI Deputy Governor H R Khan told Business Standard, "We are working on it, but it is very difficult to give a timeframe for that. We have to balance so many things. We cannot suddenly de-stabilise the whole thing. Banks are already under pressure and government borrowing continues to be very high."

Under HTM portfolios, banks hold government securities (G-Secs) till the date of their maturity. G-Secs under HTM are valued at amortised costs; they are not marked-to-market. Currently, the limit is 25 per cent. However, traditionally, it has been aligned with banks' statutory liquidity ratios (SLRs), the portion of minimum investments in G-Secs and other approved securities by banks. In July, the HTM limit was reduced to 23 per cent. The move was implemented in August.

RBI had formed a working group on enhancing liquidity in G-Secs and the interest rate derivatives market, under the chairmanship of RBI Executive Director R Gandhi. The group had brought out a report along with various suggestions. This was put up on the RBI website on August 13. The recommendations were divided into three categories - the G-Sec market, retail participation and the interest rate derivatives market. On the G-Sec market, the group suggested "a roadmap to gradually bring down the upper-limit on the HTM portfolio in a calibrated manner to make it non-disruptive to the entities and other stakeholders be prepared."

Bankers say as the supply side is heavy due to the government's high market borrowings, the central bank cannot cut the demand side, as this would exert pressure on the longer end of the yield curve. "If banks do not have the protection of HTM, they may not be willing to buy G-Secs over and above what is necessary for the SLR requirement," said a banker.

The government is set to borrow Rs 2 lakh crore in the October-March period. This would add to the budgeted target of Rs 5.7 lakh crore for this financial year. However, there is speculation in the market the borrowing target may be breached by Rs 30,000-40,000 crore.

Another banker said cutting the HTM limit would hit the profitability of banks. This is because if the limit is cut, that portion of G-Secs would be marked-to-market, and banks have to provide for that. Bankers feel unless there is a road map in place, cutting the limit shouldn't be discussed.